Weekender December 30 th , 2011 Latin Manharlal Securities Pvt Ltd - - PDF document

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Latin Manharlal Securities Pvt Ltd

Weekender

December 30th, 2011

Index Closing Chg Chg(%)

Sensex 15454.92

• 283.78
• 1.8%

Nifty 4624.3

• 89.70
• 1.9%

Auto 8143.65

• 137.82
• 1.7%

Bankex 9153.39

• 376.47
• 4.0%

Cap Goods 8067.63

• 91.86
• 1.1%

Cons Durables 5284.33

• 43.95
• 0.8%

FMCG 4035.31

• 52.87
• 1.3%

Healthcare 5870.52 12.15 0.2% IT 5751.93 75.95 1.3% Metal 9293.17

• 238.45
• 2.5%

Oil & Gas 7529.27

• 396.88
• 5.0%

Power 1795.95

• 17.11
• 0.9%

Realty 1375.65

• 52.03
• 3.6%

World Index Closing Chg(`) Chg(%)

Dow Jones 12287.04 117.39 1.0% Nasdaq 2613.74 14.29 0.5% Hang Seng 18434.39

• 194.78
• 1.0%

Nikkei 225 8455.35 60.19 0.7% FTSE 100 5552.44 61.44 1.1% Brazil Bovespa 56754.08

• 593.79
• 1.0%

Russia RTS 1368.08

• 37.20
• 2.6%

Mexico Bolspa 37185.73 118.96 0.3% Singapore Strait 2646.35

• 30.12
• 1.1%

* As on Friday 4pm

Top Gainers Closing Chg(`) Chg(%)

Redington (India) Lt 81.75 11.5 16.4% GMR Infrastructure L 21.9 2.3 11.7% Jaypee Infratech Ltd 39.85 3.2 8.7% MMTC Ltd. 537.9 40.7 8.2% Cadila Healthcar 705 47.4 7.2%

* As on 30th Dec,11

Top Losers Closing Chg(`) Chg(%)

United Spirits Ltd. 491.15

• 102.85
• 17.3%
• Guj. Fluorochemi

345

• 40.7
• 10.6%

Central Bank 65.95

• 7.75
• 10.5%

Oriental Bank of 196.75

• 21.8
• 10.0%

Bank of India 266.3

• 26.45
• 9.0%

* As on 30th Dec,11

Metal Closing Chg Chg(%)

Gold($/oz) 1571.71

• 34.64
• 2.2%

Silver($/oz) 27.89

• 1.23
• 4.2%

Aluminium($/MT) 1974.00

• 31.00
• 1.5%

Copper($/MT) 7413.75

• 117.75
• 1.6%

Lead($/MT) 1975.50

• 4.00
• 0.2%

Zinc($/MT) 1815.75

• 20.75
• 1.1%

* As on Friday 4pm

Date DII(cash) FII(Cash) FII(FO)

26-Dec-11 53.1 272 113.43 27-Dec-11 6.7 153.7 214.31 28-Dec-11

• 67.8

363.7 81.44 29-Dec-11 NA 169.7

• 1015.82

30-Dec-11 NA NA NA NA- Not Available

ADR's Closing * Chg($) Chg(%)

Infosys 51.33 0.26 0.5% ICICI Bank 26.26

• 0.83
• 3.1%

HDFC BANK 25.86

• 0.31
• 1.2%

Tata Motors 16.89

• 0.57
• 3.3%

Wipro 10.11 0.09 0.9%

* As on Thursday

SNAP SHOT

During the week ended 30th December 2011, key benchmark indices closed negative as bears tightened their grip on the market in the last week of the CY2011. Expectations of weak Q3 corporate earnings weighed on the domestic bourses as the key benchmark indices dropped for the fourth day in a row. Recent media reports that Indian and Mauritian tax officials have begun talks on revising the double taxation avoidance pact between the two countries also weighed on sentiment as it could adversely impact foreign fund flow into Indian equity market. ~40% of FIIs inflows and ~42% of the FDI in India are routed through Mauritius. While short-term capital gains are taxed at 15% in India, they are exempted in Mauritius. Several companies take advantage of the double taxation avoidance pact between the two countries and escape paying taxes in both the countries. A weak rupee added to investors' woes. The currency slid over 15% this year, the worst performance among Asian currencies,

• n concern Europe's debt crisis will slow global growth and damp

demand for emerging-market assets. FIIs sold shares worth a hefty `1015.82 Crs on 29th Dec’11. Automobile and cement stocks will be in focus in next week as companies from these two sectors start unveiling monthly sales volumes data for December 2011 from 1 January 2012. Auto stocks will also hog limelight ahead of the commencement of New Delhi Auto Expo 2012 on 7th January 2012. The next major trigger for the market is 3Q12E corporate earnings, which will start tricking from 2nd week of January

• 2012. The focus will be on guidance from the company

managements on outlook for the remaining part of the year and for the next year. Analysts expect weak Q3 December 2011 results due to lower volume growth in a slowing economy, higher raw material costs and higher interest charges.

4714 4779 4750.5 4705.8 4646.25 4624.3 4600 4650 4700 4750 4800 23-Dec 26-Dec 27-Dec 28-Dec 29-Dec 30-Dec

Nifty

Global Economic Update United States:

US Mortgage Bankers Association’s Index decreased by 2.6% For the week ended December 16, 2011 compared to prior week rise of 4.1%. The group refinancing gauge was down by 1.6% and purchases Index decreased by 4.9% for the same period.

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Research Desk Latin Manharlal Securities Pvt Ltd

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GDR's Closing * Chg($) Chg(%)

RIL 26.22

• 2.12
• 7.5%

SBI 61.95

• 0.9
• 1.4%

L&T 18.88

• 0.49
• 2.5%

Credit growth 4235421 46377 1.1% Deposit growth 5710061 62797 1.1%

Date Economic Data Previous

4-Jan

• 2.60%

5-Jan Total Vehicle Sales 13.59M 5-Jan Initial Jobless Claims 381K 5-Jan 3601K 6-Jan 8.60% 3-Jan 47.60 4-Jan 1.60% 3-Jan Unemployment Rate (s.a) 6.90% 4-Jan PMI Services 52.70 4-Jan 305.5B 5-Jan 24.10% MBA Mortgage Applications Japan Buying Foreign Bonds Vehicle Sales (YoY)

JAPAN GERMANY UNITED KINGDOM

PMI Manufacturing

UNITED STATES 12/02/201 1(`Crs) ECONOMIC CALENDAR

Mortgage Approvals Continuing Claims Unemployment Rate

Chg(`Crs) Chg(%) Banking Data

7.74% 6.92% 5.48% 3.78% 2.70% 19-Nov 26-Nov 3-Dec 10-Dec 17-Dec

Primary Articles Inflation

US Consumer Confidence rose to an eight month high in month of December. The Conference Board’s index increased to 64.5 from revised 55.2 reading in November. Initial Jobless claims increased by 15,000 to 381,000 from earlier week revised figure of 366,000 for the week ended December 24,2011 Continuing claims increased by 34,000 to 3.601 million for the week ended Dec 17, 2011 from earlier revised claims of 3.567 million of previous week.

UK & Europe:

UK’s house prices fell 2.10% and 0.20% on YoY and MoM basis respectively for the month of December. UK service output fell the most in six months in the month

• f October. Service output fell 0.7% on MoM basis, however

it rose 1.1% on YoY basis. Germany’s CPI projection stands at 2.10% and 0.7% on YoY and MoM basis respectively for the month of December.

Asia:

Japan Jobless rate stood at 4.5% for the month of November remaining unchanged from what was recorded in month of October. Japan’s Industrial production dropped by 4.00% and 2.60%

• n YoY and MoM basis respectively for the month of

November.

CURRENCY, CRUDE & G-SEC

77.97 77.88 77.94 77.64 77.39 77.3 77.5 77.7 77.9 78.1 26-Dec 27-Dec 28-Dec 29-Dec 30-Dec

USD-JPY

52.7 53.0 53.1 53.1 53.2 52.6 52.8 53.0 53.2 53.4 26-Dec 27-Dec 28-Dec 29-Dec 30-Dec

USD - INR

99.61 101.34 99.36 99.65 99.9 99.2 99.8 100.3 100.9 101.4 26-Dec 27-Dec 28-Dec 29-Dec 30-Dec

Crude($/bbl) 8.70% 8.52% 8.45% 8.34% 8.57%

8.25% 8.40% 8.55% 8.70% 8.85%

2-Dec 9-Dec 16-Dec 23-Dec 30-Dec

Govt.Yield

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Research Desk Latin Manharlal Securities Pvt Ltd

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ZYLOG SYSTEMS LTD (ZSL)

CMP (30/12/11): `400.45 Rec: BUY Target: `468.0 Upside: 16.9%

• Eq. Capital (FV `10): `16.45Crs

Market Cap: `659 Crs Shareholding: Promoters- 41.22%, FII-3.2%, Public & Others-37.93%, FIs & MFs-17.66% 52-w H/L: `468.05/334.90

Company Background Zylog Systems Ltd is an ISO 9001 certified provider of Onshore, Offshore & Near shore technology solutions and services to enterprises & technology companies across the globe. The company work with some of the world’s leading innovative Independent software vendors (ISVs) and software-enabled businesses, ranging from start-ups to established industry leaders. Business Model ZSL derives almost all its revenues from the overseas markets. The company has a strong geographic footprint across North America, Western Europe, APAC and Middle East. USA market accounts for ~ 90% of the total

• revenues. Fast growing segments like banking, financial services and insurance (BFSI), telecom and healthcare

form over 2/3 of its revenues.

INVESTMENT POSITIVES

 Provides complete Software Development Life Cycle ZSL provide complete Software Development Life Cycle, ranging from new product development and product advancement to product migration, re-engineering, sustenance and support. By leveraging our experience in product engineering, we bring products to market faster, with high quality and reduced costs. The company has technology partnership with well-known companies like Microsoft, HP, Dell, Sun, IBM, GUPTA, Brooktrou, TOrange Partner, Ubuntu and ECS.  Clients include some of the prominent names: ZSL’s customer base includes large corporate organizations as well as medium size businesses across a broad range of verticals, as well as respected leaders in Finance & Banking, Insurance, Life Sciences, Telecommunications, Retail, and Manufacturing. Some of the ZSL’s key clients include reputed corporate names like Metlife, HSBC, JP Morgan Chase, GE, Barclays, IOB, SBI, Verizon, Pfizer & Daiichi Sankyo.  ‘Brainhunter’ Acquisition: a strategic move ZSL acquired the loss making company Brainhunter in February 2010 for a consideration of US$33 mn. Brainhunter is one of the largest staffing companies in Canada. We believe the acquisition of Brainhunter is a strategic move because it gives ZSL the platform to enter Canada for its operations and the company will have access to BrainHunter’s large talent pool, over 1,400 contractors and more than 400 customers. It is also likely that ZSL will save costs on account of offshoring contracts, sourcing of contractors from India for non-government businesses and further reduction in non-billable staff. Moreover, ZSL will benefit from the increased IT spends of the Federal Government of Canada and the banks.  Promoters increase their holding in the Company recently One of the promoters of ZSL, Sthithi insurance Services Pvt. Ltd has increased its holding in the company by 4.54%, bringing it's total holding to 28.59% (during 2Q12) from its earlier holding percentage of 24.05% (at the end of 30th June 2011). This increase in the holding has been made through the open market acquisition of total 7,46,656 equity shares. This has been carried out in accordance with the guidelines set under SEBI

• Regulations. As a result of this acquisition the promoters of the Company viz., Mr. Sudarshan Venkatraman,
• Mr. Ramanujam Sesharathnam and Sthithi Insurance Services Private Limited have increased their holding in

ZSL from 36.68% to 41.22%.

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 Listed among Top 500 Technology Innovators across America ZSL has been listed in the Information Week 500, an annual listing of the most innovative users of business technology in the US. This is the second consecutive year for ZSL to break onto this prestigious list. InformationWeek 500 tracks the IT practices of the most innovative IT organizations in the US, based on the business practices of such organizations across core areas of operations including technology deployment, IT budgets, business-technology infrastructure and IT strategies. ZSL has been ranked at 202 in the Top 250 Innovators in this Top 500 listing. ZSL was recognized for its initiatives to innovate and deliver business aligned technology solutions leveraging the best of breed Cloud, Virtualization, Enterprise Social Media, Business Analytics, & Mobile technology platforms to drive effective internal and external collaboration, collective intelligence and sustainable eco- friendly computing models. The InformationWeek 500 rankings are unique among corporate rankings as it spotlights the power of innovation in information technology, rather than simply identifying the biggest IT spenders.  Wi5 Broadband – recently announced the launch of Value Added Services (VAS) Wi5 Broadband – an initiative of ZSL - a category 'A' ISP and subsidiary of ZSL announced the launch of its Value Added Services (VAS) on 12th December 2011. ZSL has earmarked around `250 Crs for its Wi-Fi broadband business. Wi5's selection of VAS offerings is based on extensive customer need analysis and it caters to different profiles of customers. We believe this initiative if successful, will augur well for the company in coming years.

Wi5 VAS offerings include: Total Internet Security - Comprehensive protection to PC/Laptop Web Builder - Easy to use website templates EduStore - Professional e-learning modules in various domains Career Enhancement - Skills for planning fast career growth Games - Exciting and engaging collection of games - totally free!

 Dividend History: dividend payout rising steadily

2 4 6 8 10 12 14 0% 20% 40% 60% 80% 100% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 ` Crs Dividend Amount Dividend-%

Source: Capitaline, Company

 Consistent financial performance ZSL has had quite an attractive growth trajectory in the past and consistently shown strong performance over the years. Its consolidated revenue and net profit have grown at a CAGR of 47.2% and 27.5% respectively over FY07-11. This was also a result of aggressive acquisitions by the company in the past.

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Research Desk Latin Manharlal Securities Pvt Ltd

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 Impressive Shareholding: (shareholding more than 1%)

Source: Capitaline, Company

CONCERNS  Quantity of Pledged shares (shares pledged as a % of total promoter holding) has shot up considerably from 32.09% in 2Q11 to 53.33% in 2Q12.  Despite huge cash & bank balances (`377.42 Crs as on 30th Sept’11), treasury income is very low and Debt has been increasing continuously (`672.62 Crs in 1H12 vs `499.28 Crs in 1H11).  Huge increase in Loans & Advances figure (`294.83 Crs in 1H12 vs. `143.83 Crs in 1H11), very little clarity on composition of the same.  Debt as well as Profit from Operations has been prominently used for funding working capital

• requirements. ~85% of the Profits from business as well as increase in debt have been used to fund

increased working capital requirements.  Huge Fluctuation in Employee cost and Software Development Cost in Standalone accounts.  Effective tax rate has gone up considerably (effective tax rate at 36.6% in 1H12 vs 23.1% in 1H11). VALUATION At the CMP of `400.45, the stock is trading at 3.17x its FY13E EPS of `126.49. We recommend BUY on the stock with a 12-18 months target price of `468.0, providing an upside of 16.9% from the current levels.

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FINANCIALS

This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without

• notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of

an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and it’s affiliates may act as market maker or have assumed an underwriting position in the secure- ties of companies discussed herein and may sell them to or buy them from customers on a principal basis.

Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052.

• Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com,

LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh).